U.S. natural gas is largely isolated from the rest of the world. That's why the huge influx of the commodity from shale drilling has pushed prices toward historical lows. The rest of the world, however, isn't awash in cheap natural gas. And that's why Royal Dutch Shell (RDS.B) is still building its global position in the space despite its U.S. woes.
Too early
Shell and ExxonMobil (XOM -2.78%) both jumped into the U.S. natural gas market early on when gas prices were relatively high. Exxon, for example, made big headlines when it bought XTO Energy for $40 billion, the timing of which CEO Rex Tillerson later described as being "off a year or two." The big drop in natural gas prices after a peak in 2008 shows exactly why.
However, these two giants weren't the only ones caught up in the buying spree. For example Ultra Petroleum's (UPL) 2012 10k notes that "As a result of low gas prices during 2012, we were required to record a $2.9 billion non-cash, ceiling test writedown of the carrying value of our oil and gas properties." That left the company with a share net loss of over $14 that year.
You could argue that it was even worse for Chesapeake Energy (CHKA.Q) where using debt to buy land quickly turned into a big liability. And it cost the company's co-founder his CEO job after Carl Icahn got involved with the company. That said, both Ultra and Chesapeake are low-cost drillers and were profitable in each of the first three quarters of 2013. So despite their bad timing, they are worth a look for investors despite low gas prices.
Continuing to grow
In fact, Matthias Bichsel, projects and technology director at Shell, lays out the issue quite well: "We have some areas that are simply not as good as others." He believes this same statement will prove true of drilling efforts around the world, too. Because not every property is created equal, Shell has been shedding some U.S. assets to focus on its best plays instead of trying to make everything work.
That's been a drag on results, but, unlike Ultra and Chesapeake, Shell doesn't focus on just the U.S. market. Natural gas is more expensive in other countries and Shell is thinking long term. That's the same reason why Exxon is sticking it out despite mistiming its splashy XTO buy.
The best example of this is probably Shell's $6.7 billion purchase of liquefied natural gas assets from Repsol (REPYY -2.79%). The deal augments Shell's position in the global trade of natural gas. Clearly, despite the troubles in the U.S. gas drilling arena, Shell is a natural gas believer. And it has the financial strength to back up its convictions.
It's important to note that Repsol hasn't exactly changed its mind with regard to natural gas. The Spanish company has been under financial stress since Argentina seized its YPF business in early 2012. Repsol and Argentina have been fighting over compensation—and it looks like all Repsol is likely to get are government IOUs. So raising some cash to solidify its finances via the Shell sale was something of a necessity.
Looking beyond U.S. borders
Chesapeake and Ultra are good companies, but Shell and Exxon have a global scale. Moreover, this pair of industry giants has deeper pockets. These two factors allow them to take advantage of natural gas trends around the world. And while low U.S. prices have been a drag, that's not stopping them from sticking out their commitment to the fuel.
Shell's purchase from Repsol is proof of this and gives the company an important position in South America. With an around 5.3% yield, Shell is a great way to play the global trends in natural gas—if, like this international energy giant, you can see beyond low U.S. natural gas prices.
